The following data are accumulated by Eco Labs, Inc. inevaluating two competing capital investment proposals:
Determine the expected average rate of return for each proposal.If required, round your answers to one decimal place.
Average rate of return for testing Equipment:
Formula for average rate of return = Estimated total income per annum/Average investment
Estimated total income per annum = $ 8400/4
= $ 2100
Average investment = (Investment – salvage value)/2
= ($56,000-0)/2 = $28000
ARR = $ 2100 / $ 28000 = 7.50%
Estimated total income per annum = $10500/5
= $2100
Average investment = $40,000/2 = $20,000
ARR = $2100/$20,000
= 10.50%
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